Since this is an equity tax, surely a loan on a house for example must be deductable?

Since this is an equity tax, surely a loan on a house for example must be deductable?

Posted by Urs Bauer33tp on December 10, 2016

If this is the case, people would take out loans on their house and instead paying tax, they would pay interest to the bank. Yes, they could buy shares, and their capital becomes productive, but it wouldn't help the state directly rather the banks.

Official response from Gareth Morgancompleted

No there are two ways you could apply the tax - tax the whole value of the asset and make interest deductible, or tax the equity only and don’t. The second is simpler.

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Ok, let’s say you have a $100,000 loan at just 2% interest, which is $2,000 a year. If you didn’t have the loan and had to pay the proposed tax on imputed rent instead, assuming a 5% annual return and 30% personal income tax rate, that would mean $100,000 × 5% x 30% = $1,500. Even at a low loan rate and high asset return and tax income rates you’d still be $500 better off by paying the tax. That still makes it look foolish to me to increase debt to save tax.

Urs Bauer commented
2016-12-10 12:46:18 +1300

There is a system like this in Switzerland and it is common sense there, that you definitely have a loan on your house to avoid tax. Yes interest rates are much lower (around 2%). However, if you even invest conservatively, you still get 5% return, which you then have to tax again. It’s foolish there NOT to have a loan on your house!

Oliver Krollmann commented
2016-12-10 11:22:01 +1300

The interest paid to the bank would be a lot more than the tax on the equity, so taking on more debt to avoid paying tax would be foolish.